I know a little something about Registered Plans as I have been working with two kinds for the last 5 years.
I know there are more than two, but the advice I have to give is good for all of them. Yes my knowledge is about Canadian Registered plans but I feel fairly confident that this advice is good for anyone, anywhere thinking of putting money aside.
First what is a Registered Plan?
A Registered Plan is an investment product offered through various financial institutions which are covered by basic federal government legislation. Usually the purpose of a Registered Plan is to put money away for a future aim. Registered Plans can be tax sheltered (the interest is taxed only at time of withdrawal) or tax deferred (the money you put into the plan is only taxed at time of withdrawal)
What kinds of Registered Plans exist in Canada?
Registered Pension Plans
A registered pension plan (RPP) is an arrangement by an employer or a union to provide pensions to retired employees in the form of periodic payments. The Income Tax Act provides deductions in respect of both employee and employer contributions. Contributions and investment earnings are tax-exempt until such time as benefits commence to be paid.
Registered Retirement Plans
A registered retirement savings plan (RRSP) is an arrangement between an individual and an issuer (an insurance company, a trust company or a bank) under which retirement income commences at maturity. Contributions are made by individuals and are deductible under the Income Tax Act. Earnings in the plan remain tax-free and payments out of an RRSP are taxable on receipt.
A registered retirement income fund (RRIF) is an arrangement between a carrier (an insurance company, a trust company or a bank) and an annuitant under which payments are made to the annuitant of a minimum amount each year. The property under a fund is derived only as a result of a transfer of funds from another RRIF, an RRSP or a registered pension plan and annual amounts must commence to be paid to the annuitant immediately. Property and earnings in a RRIF are tax-exempt and amounts paid out of a RRIF are taxable on receipt.
Registered Disability Plans
A registered disability savings plan is a trust arrangement between a holder and an issuer (a trust company in Canada). The purpose of such a plan is to provide for the long-term financial security of a beneficiary who has a prolonged and severe physical or mental impairment
Registered Education Plans
A registered education savings plan (RESP) is a contract between a subscriber and a promoter (banks, trust companies and scholarship funds) and is a tax-deferred way to save for a beneficiary's post-secondary education. Contributions made by the subscriber are not tax deductible but earnings on such contributions are held in a tax-exempt trust. Contributions may be eligible for Canada Education Savings Grant (CESG) payments that are managed by Human Resources and Skills Development Canada (HRSDC). Investment earnings on contributions and CESG payments grow tax-free until they are distributed and included in the recipient's income and taxed accordingly.
Tax Free Savings Account
Contributions to a TFSA are not deductible for income tax purposes. Also, interest on money borrowed to invest in a TFSA is not tax deductible. However, the income generated in such an account (for example, investment income and capital gains) is tax-free, even when it is withdrawn.
What is my advice?
1. Start early. It doesn't have to be much, $5.00 to $10.00 a month. You'd be amazed how little amounts can add up quickly. Just think about the last time you went shopping in a dollar store. Everything there is a dollar or two yet somehow, you get to the cash and it costs you fifty to sixty dollars. The same goes for putting money aside.
Furthermore, the longer the money is in a registered plan the better chance it has to grow. Also if you put a little in early, on a regular basis, the less you will have to find at the last minute to meet your goals.
2. Shop around. Many people think that registered plans are a government thing and they are all the same. In fact, they are legislated by government but nevertheless a financial product that can differ from one financial institution to another.
If you were buying a car or a computer, will you buy the first one you saw in the first place you went to? No? Of course you won't -- because you're buying something that's hopefully going to last a few years and cause you the least amount of hassles for those years. So why are you treating a registered plan that you will be paying into for the next 10, 15, 20 years any differently?"
3. Do your own research. Financial advisers can be a useful tool to introduce you to the concepts but quite honestly they don't always know what they are talking about or doing and their mistakes can wind up costing you big time. There are some good ones out there for sure but you will never know if yours happens to be a good one of you have no idea what he/she is talking about.
4. Read everything before you sign. If you don't understand something get answers before you sign anything. I can't stress this enough...
I have heard very often "nobody told me this" when it was very specifically mentioned in the document they signed and agreed to. After you sign, it might not hurt to re-read contracts every once in a while to ensure you are respecting the various clauses. Not respecting some clauses could very well nullify your plan or investment, causing you to loose it all.
5. Don't be afraid to ask questions! The more you know, the better you can choose the product that is right for you. I have provided a few sample questions below:
- Once I have opened a registered plan, will I have to pay any fees? If so, what are they for and how much will I have to pay?
- Do I have to put a minimum amount of money into a registered plan?
- Do I have to make regular payments?
- What happens if I can't make regular payments?
- What are my investment choices? What are the benefits of each choice? Can the value of my investment go down?
- Can I withdraw money if I need it? Are there any fees or penalties for withdrawing money early?
- Can I transfer the registered plan to another person, or to another registered plan provider? What is the cost to transfer?
- What will happen to my savings in the registered plan if my aim doesn't happen? (Kid does not go to school, disability goes away...)
- What happens if I close my registered plan early?
- Does the registered plan provider offer any government incentives that are available?
- What happens in the event of the death of the plan holder?
- Is there a contact person at the financial institution that I can speak to if I have any further questions?
6. Ask for monthly statements and read them. Make sure that everything is OK and there are no problems. This is especially important if you are requesting any government incentives such as those offered through the education and disability plans. Be involved in your investment; don't assume things will take care of themselves.
7. Follow your intuition. I know what kind of advice is that? We often forgo our intuition or instinct because we can't justify it with facts. Sometimes our subconscious mind caught some detail that your conscious mind didn't and your intuition is really trying to warn you. If you feel unsure or uncomfortable it is not the right product, plan, advisor or institution for you.
What would be your advice?
Thanks for reading!